tinting machine supply disruption

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

Tinting machine supply disruption

The global chip shortage has been in the news for a while, mostly focused on its impact on the automobile industry. But it would impact several industries including possibly paint companies in terms of supply of tinting machines. Tinting machines have become indispensable for paint companies in order to match the changing

colour needs of consumers. These machines come with added benefits of consistency, precision, high dosing speed, ease of operation and advanced technology.

In this report we take a look at the importance of tinting machines for paint industry and the impact of chip shortage on supply of these machines.

Why is tinting machine so important?

Paint dealers prefer to have tinting machines of known brands given that shop

space is limited. These machines help paint shops satisfy the changing paint need

of consumers with much lesser inventory. Tinting is the mixture of tint bases and

colorants or pastes. Tinting machines help the paint shop produce different coats

of emulsion paints within the shop as per requirement, instead of holding a massive

amount of shades and SKUs.

Chip shortage starting to impact tinting machine

Chip shortage has impacted the supply of tinting machines. Till now, there is no

major inflation in prices of tinting machines. Indigo Paints mentioned vs a demand

of 200 tinting machines per month, suppliers are able to provide 150.

Why is there chip shortage globally?

1) COVID-19 pandemic impacted supply due to lockdowns but demand was high

due to WFH. 2) In 2020, US placed restrictions on SMIC, China's biggest chip

manufacturer. 3) Taiwan saw its worst drought in 50 years in 2021, leading to

problems among chip makers that use large amounts of ultra-pure water to clean

their factories and wafers.

Outlook: Impact on supply to last few quarters

We expect delays in tinting machines to remain for a few quarters for most paint

companies. This could impact paint companies in terms of expansion in new

dealers. We expect lower impact on Top 2 players as they already have a high tinting

machine penetration vs smaller peers.

Indigo paints, a relatively new player, has the highest rate of tinting machine

addition over past the few years (51% vs 15-20% for Top 2 players) given its smaller

base and aggressive plans. With global chip players trying to ramp up production, it

would still take a while as supply constraints cannot be solved quickly. However,

recovery also depends on user products; for example, many auto makers operate

in a just-in-time model, which will mean that they have to make some changes in

their purchasing model and shore up inventory to get supply on track.

India Equity Research Consumer discretionary September 22, 2021

Food for thought SECTOR UPDATE

Abneesh Roy Tushar Sundrani Amritasai Sista +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected] [email protected]

Consumer staples

Edelweiss Securities Limited

2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset

Tinting machine: an important part of Paint distribution

Today tinting machine is the norm in most paint shops in the country and globally.

Tinting is the mixture of tint bases and colorants or pastes. Tinting, particularly with

respect to industrial coatings, help the shop to be more flexible and target smaller

custom jobs, which opens up a new market for them.

At the same time, Tinting machines have created hindrances to the delivery network.

Many dealers are unable to install a new company's tinting machine mainly due to

space constraints. The large number of SKUs and product ranges in emulsions

renders installation of tinting machines imperative for timely distribution of

different shades and products.

In the paint store, the tinting system provides the end user with a full solution

compliant with the coating industry standards. Different shades of emulsion paints

are produced through in-shop tinting machines present at dealer outlets. These

tinting machines are unique to each paint manufacturer due to the design

specifications with respect to colorants, emulsion bases, fan–decks or shade cards,

and customized software applications.

By building a large network of more than 70,000 dealers, Asian Paints has developed

its distribution network in a dominant fashion. Since dealers have limited workspace,

Asian paints has setup one or two machines per dealer. Any new player meets a stiff

resistance for installation from dealers due to lack of physical space at their

counters. As a result, most dealers tend to install tinting machines of only known

brands.

Indigo Paints has installed tinting machines across India through their focus on

differentiated products and branding efforts, specifically in Tier 2 – 4 Cities and Rural

Areas where the penetration of tinting machines is relatively low.

Estimated tinting machine count across companies

Company Machine count

Asian Paints 58000

Berger Paints 22400

Kansai Nerolac 17000

Akzo Nobel 5500

Indigo Paints 5800

Source: Edelweiss Research

Average annual tinting machine addition rate since FY18

Company Average annual tinting machine addition %

Asian Paints 14.6

Berger Paints 19.5

Kansai Nerolac 30.4

Akzo Nobel 31.1

Indigo Paints 51.2

Source: Frost and Sullivan, Company

Indigo paints, a relatively new player has the highest rate of tinting machine

addition given its smaller base and aggressive plans. Companies employ various

promotions and offers to push their tinting machine to dealers. Given that dealers

have a limited shop floor space, setting up a tinting machine is in a way act of

drawing one’s territory. Companies who are aiming to improve penetration have

been more aggressive relatively and have come up with unique ways to push their

machines. Indigo paints has come up with attractive schemes and discounted


Consumer staples

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3

maintenance charges for its machines and JSW paints in larger cities has come up

with ‘tinting spokes’ where its warehouses are located so that the retailers in the

vicinity can access these spokes for their needs and do not have to invest in this

machines or worry about maintenance.

Tinting machine

Source: Company

Global chip shortage impacts tinting machine supply

The global chip shortage is an ongoing crisis in which the demand for integrated

circuits (commonly known as semiconductor chips) is greater than the supply. This

has been in the news for a while and most of the focus has been on the impact on

the automobile industry, however it is affecting more than 169 industries and has

led to major shortages and queues amongst consumers for video cards, video game

consoles, cars and also the paint industry.

Some of the possible causes for this shortage are: -

1) The COVID-19 pandemic is the main cause of the global chip shortage. On the

supply side due to global lockdowns, chip production facilities shut down which

caused stock to drain. On demand side due to the pandemic, more people had to

stay home and upgraded their electrical devices such as webcams, monitors and

computers in order to stay in touch and be entertained. In the fourth quarter of

2020, traditional computer sales saw a 26.1% growth over the previous year.

2) In 2020, the United States government placed restrictions on Semiconductor

Manufacturing International Corporation (SMIC), China's biggest chip

manufacturer, which made it harder for them to sell to companies with American

ties. These restrictions forced companies to use other manufacturing plants

like Taiwan Semiconductor Manufacturing Company Limited (TSMC) and Samsung.

However, these companies were already producing at maximum capacity.

3) In 2021, Taiwan experienced its worst drought in more than half a century,

leading to problems among chip manufacturers that use large amounts of ultra-pure

water to clean their factories and wafers. For example, TSMC's facilities used more

than 63,000 tons of water a day, more than 10 percent of the supply of two local

reservoirs

Chip shortage has impacted the supply of tinting machines across most paint players.

There is no major impact on the cost of the tinting machine itself, but the impact is

more on the supply time. During our recent talk with Indigo Paints, the company

mentioned that it currently needs 200 tinting machines per month roughly, whereas

Consumer staples



suppliers are able to provide only 150 machines per month. The delayed supply of

tinting machines will make it difficult for companies to supply tinting machines for

new paint shops and shops who are upgrading space to include tinting machines

now. This also means that companies who already have a high tinting machine

penetration like Asian paints and Berger will see relatively less impact than

companies that trying to grow their tinting machine presence


Consumer staples

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 5

DISCLAIMER Edelweiss Securities Limited (“ESL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, Investment Adviser, Research Analyst and related activities.

This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, ava ilability or use would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the ESL through this report.

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.

ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the

Securities, mentioned herein or (b) be engaged in any other transaction involving such Securities and earn brokerage or other compensation or act as a market maker in the financial

instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with

respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short

position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment

objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business

with ESL.

ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.

Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk.

Research analyst has served as an officer, director or employee of subject Company: No

ESL has financial interest in the subject companies: No

ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No

ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No

Subject company may have been client during twelve months preceding the date of distribution of the research report.

There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer.

A graph of daily closing prices of the securities is also available at www.nseindia.com

Analyst Certification:

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

http://www.nseindia.com/

Consumer staples



Additional Disclaimers

Disclaimer for U.S. Persons

This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.

Disclaimer for U.K. Persons

The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person. Disclaimer for Canadian Persons

This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.

This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.

ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.

Disclaimer for Singapore Persons

In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors.

Disclaimer for Hong Kong persons

This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain

Head of Research

[email protected]

tinting machine supply disruption

Documents